How To Make Passive Income Through Rental Properties

Published 24 February 2022 - Updated 11 days ago

If you’re looking to build wealth through investing, you might be thinking about buying an investment property. With the ATO reporting that over two million Australians are property investors (or roughly 20% of Australian households), you’re not alone either. 

While it does require a bit of an upfront investment, investing in property can easily become a set-and-forget income stream. In fact, earning passive income through rental properties is easier than you might think. 

In this blog, we’ll run you through why property is a winning passive income investment and a stack of practical ways for how to create passive income in real estate (even if you’re a first-time investor).

Why real estate investing is a great way to earn passive income

If you’re wondering how easy it is to earn passive income through rental properties, here’s what you need to know. Roughly speaking, 40% of rental properties in Australia are generating positive cash flow (a.k.a. Generating passive income for these investors). 

This strong chance of generating passive income through rental properties is why many investors choose to invest in property. 

It all comes back to having the right investment strategy in place from the beginning to make sure you’re buying the right property in the right location (and setting the right rental price). 

With a positive gearing strategy, your rental property will generate more income than it costs in expenses to run. Take this example: let’s say your property costs $400 a week in expenses and you’re earning $600 per week in rent. That’s a positive cash flow of $200 per week!

Plus, if you’re looking for a set-and-forget investment that doesn’t impact your free time, hiring a property manager can make this a hands-off investment option. With an experienced property expert handling the day-to-day running of your property, hiring a property manager is a proven way to generate passive income through rental properties.

How to create passive income through real estate

Ready to start generating passive income through rental properties? Here are a stack of practical ways you can get started with property investing and ensure you’re scoring positive cash flow from your rental property.

1) Use a positive gearing strategy

As we mentioned, positive gearing is a smart investment strategy to generate passive income through real estate investing. 

Especially as a first-time investor, using a positive gearing strategy means you’re scoring extra cash to maintain your property, build your property portfolio or provide extra financial security. 

Plus, there are plenty of suburbs across Australia that allow investors to follow a positive gearing strategy

If you’re thinking about using a positive gearing strategy, make sure to look for suburbs that offer:

  • Affordable property prices to ensure you can lower your mortgage repayments and keep costs down.
  • High demand for rentals to ensure you’re buying in a competitive market when you can charge a premium for rent.
  • Low vacancy rates to reduce the chance of vacancy and help you score passive income through rental properties.

2) Choose a property type that will deliver a passive income investment

The type of property you purchase (such as a commercial vs. residential rental property) has a big impact on whether you can generate passive income through rental properties. Each suburb will have its own tenant demographic who will be searching for a particular type of property. 

So, it’s important to use local demographics data when purchasing your investment property to generate passive income through rental properties. 

By looking at employment trends, income profiles and population growth, you’ll be able to make an informed decision about what type of property will attract the best tenants. 

Here are a few example of how this plays out for investors:

  • If a suburb has a high density of young families, look for standalone family homes with two or more bedrooms (especially properties with a backyard).
  • If a suburb has a high density of students or young couples, look for low-maintenance apartments and townhouses close to the CBD.
  • If a suburb is a tourist hotspot with year-round demand for short term rentals, consider a holiday house, vacation home or Airbnb investment property in close proximity to local attractions (such as beaches or national parks).

By selecting the right property type for the local area, you’ll score strong demand from tenants (which can allow you to charge a premium for rent).

Speaking of property data, it’s also important to look at supply and demand indicators to find out if you’re investing in a positively geared suburb. 

The key to earning passive income through real estate investing is to ensure you don’t overpay for an investment property. If you buy in a hot or competitive market, you’ll likely end up with a hefty mortgage to pay off. 

Instead, by choosing a property market that is less competitive, you’ll score a more affordable property with lower mortgage repayments (making it easier to score positive cashflow week on week). 

The key pieces of data you’ll need to consider are:

  • How many properties are listed for sale vs. how many are being sold: high listing volumes but a low number of recent sales can indicate demand is lower in the area.
  • Days on market: if rentals are sitting on the market for too long, it can indicate there is an oversupply issue in the suburb (which can lower your chances of earning passive income through rental properties).
  • Vacancy rates: it’s important to purchase properties in suburbs with low vacancy rates. Remember: a vacant property can cost you hundreds of dollars in lost income per week.

4) Purchase an investment property that will attract good tenants

The key to keeping expenses down is to ensure your property is tenanted all year round. So, you need to make sure you’re purchasing a property that comes with all features tenants expect in your local area. 

So, it’s important to consider the demographic of tenants in each suburb and find properties that tick their boxes. Try answering these questions:

  • How many bedrooms and bathrooms do tenants expect at a minimum?
  • Do tenants want garages or are they happy with on-street parking?
  • Is a home office important to these tenants?
  • Is a ground-floor apartment more appealing than a penthouse?

By finding a property that comes with all the features tenants are searching for, you’ll be able to attract a wide pool of prospective tenants to choose from. Not only does this get your rental property off the market faster but ensures you’ll avoid vacancy in the future (and lost rental income), too.

5) Look for a low-maintenance rental property

Maintenance and repairs are unavoidable expenses as a property investor. However, you can reduce how much you need to spend by opting for a low-maintenance property. 

In general terms, new homes and apartments tend to come with the lowest maintenance costs. Why? Well, older properties can come with major structural issues and may have been poorly maintained in the past, leaving you as the latest owner to foot the bill. 

Plus, apartments tend to be smaller in size and don’t have large backyards, gutters or expansive garages to keep in good condition.

By finding a low-maintenance property, you’ll save big on repairs and boost your chances of generating passive income through rental properties.

6) Work with a good property manager

If you’re looking to score passive income through rental properties, you want to make sure you’re not spending your spare time organising repairs and chasing up rental arrears. 

That’s why 80% of property investors in Australia choose to hire a good property manager to take care of their rental properties for them. 

From managing your leasing campaign to help you secure long-term tenants all the way through to routine inspections (to catch small issues before they become big, costly repairs), an experienced property manager allows you to take a set-and-forget approach to your rental property. 

When it comes to scoring passive income through rental properties, having a positive gearing strategy in place ensures you’re consistently generating positive cash flow as an investor. By keeping your expenses lower than your weekly rent and working with a good property manager, you’ll earn extra income without having to put in any extra effort as a property investor.

Want more insights into the world of property management and real estate?

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Disclaimer: The views, information, or opinions expressed in this blog post are for general information purposes only and should not be relied upon. We have not taken into account specific situations, facts or circumstances, and no part of this blog post constitutes personal financial, legal, or tax advice to you. You should seek tax advice from your accountant, specific to your situation.

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